The digital economy, particularly through the phenomenon of ‘servitisation’ and the ‘platform economy’, has significantly transformed interactions between businesses, consumers, and tax administrations. This shift represents an evolution from a traditional ownership-based model to one centred on access to services. In this new landscape, consumers benefit from improved accessibility and usage conditions for goods and services, while businesses gain new opportunities to diversify their revenue streams.
The rise of servitisation
Servitisation is an increasing trend in which services are integrated into product offerings, progressively blurring the lines between goods and services. This shift has even led to the complete replacement of certain physical goods, such as records or books, with digital services such as streaming playlists. For instance, whereas few people today purchase vinyl records (a supply of goods), most subscribe to music streaming services (a supply of services). The implications of this new consumption pattern for VAT are immense.
The role of digital platforms
Digital platforms, defined as technological infrastructures that facilitate direct interactions between suppliers and multiple users, are at the core of the digital economy. Unlike the traditional economy, which relies on physical interactions between the parties involved in a transaction, digital platforms streamline and manage these interactions between providers and end consumers, acting as intermediaries or as active facilitators of commercial transactions. It is the legislator’s responsibility to ensure that the traditional economy is not unfairly disadvantaged compared to the platform economy. If both serve the same type of consumer (which is debatable in certain cases), they should be subject to the same tax treatment.
From a tax perspective, digital platforms play a crucial role in two key areas:
In the collection and transmission of data to tax administrations; and
In their responsibility for collecting and remitting VAT (deemed supplier provisions).
The former aspect is being particularly reinforced by European regulations, such as the DAC7 Directive (Council Directive (EU) 2021/514), which establishes due diligence obligations for digital platforms.
DAC7: strengthening administrative cooperation
The DAC7 Directive aims to enhance administrative cooperation in taxation by imposing obligations on digital platforms to collect, verify, and report detailed information about active sellers engaging in relevant activities, including so-called personal services. The information required includes tax identification details, addresses, the number of transactions conducted, the compensation received, and specific details in the case of real estate rentals.
DAC7 clearly defines key concepts such as platform, platform operator, and relevant activity. The platforms covered by the directive are those that facilitate direct or indirect commercial interactions between users, excluding those that merely process payments, conduct advertising services, or redirect users to other platforms, a definition that closely resembles that of a “facilitating platform” under VAT rules. Platform operators, which provide the infrastructure for transactions between sellers and consumers, must comply with strict reporting and verification obligations.
The directive distinguishes between active sellers, those subject to reporting, and those that are exempt. Active sellers are those that conduct transactions within the relevant reporting period. Reportable sellers include individuals or entities residing in the EU or in partner jurisdictions, and those engaging in activities such as property rentals within these territories. Exempt sellers include government entities, publicly listed companies, and those with minimal economic activity.
Non-compliance with DAC7 obligations can result in penalties, not only for platform operators but also for sellers subject to reporting. The directive establishes clear enforcement mechanisms, such as the temporary or permanent suspension of accounts and the withholding of payments until compliance with reporting requirements is ensured.
Harmonising reporting obligations: a necessary but complex task
The platform economy and servitisation represent deep shifts in both economic and tax models. Effective collaboration and coordination between digital platforms and tax administrations are essential to ensure transparency, efficiency, and fairness in tax collection. This new regulatory framework is not only intended to increase tax revenues but also to promote fiscal transparency and fairer competition in the digital marketplace.
Some platform operators argue that excessive bureaucratic requirements are being imposed on them, making their operations more complex and expensive. The DAC7 reporting obligation shares many similarities with the VAT record-keeping requirements for digital interfaces facilitating certain supplies of goods and services. In some cases, the information required is similar or even duplicated, but it must be stored in different ways and provided through separate procedures to different tax administrations, as each has distinct objectives.
Perhaps it is time to consider harmonising these reporting obligations in some way. It is a complex task, but it should not be dismissed. The collaboration of digital platforms is undeniably crucial in today’s economy, but turning them into quasi-tax inspectors (while also exposing them to penalties for non-compliance) may, in some cases, be excessive.
